A Voice of Conservatism Living in Carolina Blue

The Liberals Of Today Don’t Remember The Lessons Of Yesterday

And it’s not their fault. See, the Liberals of yesterday have grown up and become the Conservatives of today.

Our problem is that we keep having children who become Liberals for a short time before reaching full adulthood.

Now, to be sure, some of those kids become infatuated with the concept of Liberalism and make it a lifestyle, but by and large….our youth outgrow their Liberal tendencies nicely.

Which leads me to this point.

We know that the housing bubble lead to our current economic malaise. AND we know what lead to the housing bubble.

The problem? Yesterdays children don’t.

The bubble was created because we, the government we, felt that all people needed to own a home. And so, we, the government we, created a scenario in which anyone, regardless of income or wealth, could march into a money selling place and buy money. In fact, they could buy money often times without having any money at all. Or even any HOPE of ever GETTING any money.

So, housing went up and up and up—until it didn’t. And when it didn’t, it crashed.

Chapel Hill, N.C. — Town officials looking to expand affordable housing options in Chapel Hill are meeting with different segments of the community to establish some goals and priorities.

Eegads! Housing is unaffordable in Chapel Hill? How do we know?

According to a residential market study completed in December, Chapel Hill has the most expensive housing in the Triangle, with a median home sale price of $323,300 last year. By comparison, the median price was $270,000 in Cary, $185,000 in Raleigh and $164,000 in Durham.

Oh. I see. Because a thing in one place is more expensive than a thing in another, we have a problem.

I wonder why houses in Chapel Hill are so expensive?

Loryn Clark, neighborhood and community services manager for Chapel Hill, said the limited amount of undeveloped land in the town and the lengthy approvals process for new developments are two reasons homes and apartments are pricier in Chapel Hill.

Oh. I see. Two perfectly good reasons.

Supply and demand

Regulation

I wonder if Ms. Clark agrees? Let’s see.

Chapel Hill has tried to deal with housing costs before. One response was to require developers to set aside 15 percent of new projects for lower-priced homes.

Clark said officials are now trying to reach out to various groups to find new ideas to address the issue. Officials have met with local teachers, public safety personnel and people who work at UNC and UNC Hospitals, she said.

“Rather than just talk to the agencies themselves, we are actually talking to the people who are looking for housing to hear from them what their needs are,” she said.

Some people have suggested changing the income requirements for Community Home Trust, which administers the 15 percent set-asides in developments.

Yeah….nope. She doesn’t.

When faced with the truth, like things in short supply cost more, and government regulations, like overly regulated land use laws, the Liberal doesn’t understand. Their only answer is to add yet MORE regulation.

Pino wrote:
“the government we, created a scenario in which anyone, regardless of income or wealth, could march into a money selling place and buy money. In fact, they could buy money often times without having any money at all. Or even any HOPE of ever GETTING any money.”

I agree that people were extended too much credit, but I do not blame the government directly. So many people KNEW that houses were going to continue to increase in value FOREVER. Buying a house was considered by many to be a guaranteed money maker.

My Three Reasons for Real Estate Crash:
1. Home ownership was such a secure investment that MANY people began pulling equity out of their homes to either buy even bigger houses or (and this is the worst part) buy stuff, lots of stuff. Stuff that they just had to have. They never worried about paying for these things because they could always rely upon the increased wealth being generated by their real estate holdings.
2. When people go shopping for a mortgage, they show their earnings, expenses and additional assets. The bank either says yes or no. One thing that the bank has no control over is the way people spend their money AFTER getting the mortgage.
3. It became socially acceptable for people to just walk away from their homes. Even Kym Worthy, the Wayne County prosecutor that worked to oust the corrupt Detroit Mayor Kwame Kilpatrick was in the process of doing a short sale of her home that was in foreclosure in 2008. She could afford to make the payments, she just choose to get out from under the mortgage because it was a “poor” investment. I never read anything more about that short sale. It appears that she underestimated the bad press that a government prosecutor would receive by breaking a legal contract with her lender.

I’d add that when you look at the places where the housing market crashed the worst (Florida and Las Vegas for instance) people were buying real estate as investment properties, not to live there. That had ABSOLUTELY NOTHING to do with providing people with affordable housing. It was speculation, plain and simple and it was enabled by a whole chain of business entities and govt practices. This is not a crisis that can be blamed all on one party or one ideology or solely on govt or solely on banks. There is a ton of blame to go around.

That had ABSOLUTELY NOTHING to do with providing people with affordable housing.

I think you are right. However, it was because of programs that incented people to buy houses on the cheap that allowed speculators to attempt to take advantage of the fact. In other words, the speculators would not have been able to speculate if they had been required to put 20% down and demonstrate that they could make good on the loans.

And THAT has a lot to do with providing houses to people who can’t afford houses.

Also note that most people didn’t have to show earnings, expenses and additional assets. “No doc” mortgages (sometimes called Alt-A) became ever more common. The big financial institutions needed mortgages to package into bonds and sell as safe “AAA” investments (since historically 98% of mortgages are repaid). Predatory lending practices have been well documented, where refis and other manipulations added to the problem. It was the functional equivalent of institutional fraud, and nobody went to jail.

Also note that most people didn’t have to show earnings, expenses and additional assets.

Again, I agree with this comment as well.

I do not think that banks, on their own, would have made those loans to those borrowers without the regulations in place. I think that they were required to make a set % of loans to “under-served” populations. And after that, institutions began to buy those loans off of the banks. It’s my opinion that those institutions were dominated by Fred and Fan.

“I do not think that banks, on their own, would have made those loans to those borrowers without the regulations in place.”

At least out here in CA, those types of “liar’s loans” were written to a wide spectrum of buyers. It wasn’t just the “underserved” groups who were taking them. It was also the upper-middle-class white folks who wanted to buy a McMansion when they really only had the income to purchase a little starter home. I heard the same type of irrational exuberance about real estate from acquaintances that I had heard about tech stocks back during the “dot com” bubble.

We’d see people we *knew* had a lower income than us buying homes left and right and we’d ask them how they did it. They would cavalierly admit that they couldn’t really afford the mortgage when the “interest only” period was up, but would blithely say that they’d just re-fi or sell for a fat profit. Fast-forward a few years, and now they’re losing the homes to short-sale or foreclosure. I’m having a hard time finding any sympathy for them…

I have little sympathy either. I suspect that the people buying homes they couldn’t afford intuitively KNEW they couldn’t afford those homes. I’m sure that predatory lending occurred, but I don’t think it at the level it has been rumored.

The problem is that the wrong incentives were created. People reacted to those incentives like rational self interested people will respond. Lower the price of Doritos and more people will bu Doritos. Pretty simple.

Make it too easy for people to buy homes and, check it out, more people will buy homes.

And, by the way, this same phenomenon exits for banks.

Create a secondary market for institutions to sell mortgages [ahem Fannie Mae!] and more banks will sell more mortgages.

Except the bubble was not primarily due to housing for the poor. The bubble was caused by derivative trades on bonds that were backed by bad mortgages. Those mortgages were offered by banks NOT because of government desire or incentives, but because big financial institutions wanted more mortgages to turn into derivatives. They got these bonds ranked AAA, so it was a way to leverage their way to massive profits. That, plus cheap credit (an expansive monetary policy during a boom) created the bubble. This also included people taking home equity loans to pay for other things (assuming their homes would keep going up in value) and speculation of people buying houses assuming they could flip them. There were some bad government policies, especially at Fannie Mae and Freddie Mac, but they were actually late comers to things like the subprime game.

If derivatives had been regulated, if the ratings agencies had been doing their job (something that started veering away from once they became publicly traded companies with a stronger profit motive), and if monetary policy had been sound, then the bubble could have probably been avoided. It is simply not accurate to blame it on a desire to get the poor into homes — that wasn’t the major driving force behind the bubble.

Regulations to prevent fraud and to prevent inside information from allowing people to stack the deck in their favor (even if not directly fraud) are necessary. For example, the derivative market was huge — overtook the rest of the bond market in scope — but since it was over the counter (OTC) there was no oversight at all. The government didn’t know how much was being done, or what was in the contracts. If they had, this could have been made transparent far earlier. Frontline had a great show on this, detailing how the free marketeers of the Clinton Administration torpedoed an effort by Brooksley Borne to regulate OTC derivatives. Later, in testimony before Congress, Alan Greenspan admitted that his naive view that “markets get it right” had been proven wrong by the financial disaster. He said (it’s also in the video) that his world view had been wrong, it was a naive belief in markets probably based on his belief in some of the teachings of the long debunked Ayn Rand:http://www.pbs.org/wgbh/pages/frontline/warning/

He said (it’s also in the video) that his world view had been wrong, it was a naive belief in markets

I firmly believe in the power of the market. As long as the proper role of government is met [ to prevent fraud and prosecute when it occurs] the market will pick the winners and pick the losers. Is it “right” 100% of the time? No way. Companies will fail, capital will be lost and people will be hurt. However, generally speaking, more people will be more better off.

We all have our villains who we blame for this . Democrats blame deregulation, Wall Street, the banks, Republicans . Republicans blame Fannie, Freddie, and Democrats mandating mortgages for idiots .

None of us would borrow money to a person or a group of people, that we didn’t think could pay it back. So too are banks in a similar situation. They are incented to make those loans because they are required to our because there is a market on the back end for those mortgages.

Markets are powerful and are the reason for our prosperity. Lack of markets led to the collapse of communism (something I write about in my blog a bit today). I just think that regulation is necessary because markets need rules to function as they should (that’s something even Adam Smith recognized). I’m not in favor of massive regulations by any means!

Alan Scott said: April 30, 20116:17 pm

Once banks could sell mortgages they became originators only . They no longer had to live with the loan for 30 years . Why would you care about the loan defaulting, once you no longer own it ? It is easy to condemn them as liberals do, but think about it . When all of your competitors are writing loans to idiots and even your good customers are going for stupid loans, you are going to do it too . Or you are not going to stay in business.

At some point the powers that unleashed this process stopped knowing or caring where it was heading . The problem is pinning that blame . We all have our villains who we blame for this . Democrats blame deregulation, Wall Street, the banks, Republicans . Republicans blame Fannie, Freddie, and Democrats mandating mortgages for idiots .

Good points. Everyone thought they were evading risk. The mortgage brokers didn’t care about the borrowers inability to pay because they were going to sell the mortgage right away. The banks that bought it didn’t care because they were going to package them up into bonds. At first AIG reinsured those bonds because they didn’t understand what it was all about. Once they did and stopped insuring them, the banks thought if they spread out the risk it would disappear. They never understood that by trying to make easy money and get rid of risk they created systemic risk. There were multiple causes — Nocera and McLean’s book “All the Devils are Here” is excellent because it goes after both parties and policies based on both liberal and conservative ideals. This crisis is truly bipartisan.

I suppose in 10 or 15 years when it is no longer profitable to use the bank failures as a political weapon the truth will become conventional wisdom . Right now since Republicans were in power when it blew up they receive the lion’s share of the blame . By then the guilty will be dead , retired , or rich authors .